What Groupon and LivingSocial Cannot Offer
Posted on Harvard Business Review: January 25, 2011 9:37 AM
Last month,Amazon invested $175 million in the number two online coupon site LivingSocial. True to form, Amazon is already using the platform to create enormous buzz: last week, they announced a coupon: $10 for a $20 Amazon gift certificate. Within hours, the offer generated massive interest, giving LivingSocial one of their biggest growth days and selling over $10 million in Amazon gift cards (over 1.3 million units sold in a single day).
LivingSocial is not the first to create a compelling coupon offer. That honor goes to the market leader, Groupon. In August of last year, Groupon partnered with The Gap to offer a similar 50% off coupon, generating a whopping $11 million in sales in a single day. This likely influenced Google to reportedly offer Groupon $6 billion for the company (which was turned down) and the company to raise a record $950 million from investors. Now, thousands of companies are jumping on the latest trend trying to generate buzz for their products.
Putting aside whether coupon sites are sustainable, all this begs the question of the value of buzz and being a first mover. The costs are clearly high, but companies with products that tend to generate early buzz seem to do very well. At least that is the conventional wisdom. But a new study shows that no amount of buzz, excitement or first mover's advantage will lead a product to sustained growth.
The study, led by MIT's Dr. Sandy Petland who runs the MIT Media Lab Entrepreneurship Program, tested whether early buzz could precipitate a product's ultimate success. Using an online music test site, researchers tested whether music that was highly praised early on would be downloaded more than songs with less buzz. True to form, results from an initial study demonstrated that buzz and social influence generated early adoption and the more a song was discussed, reviewed and downloaded, the more people wanted the song. Success begets success.
But then Petland's research team took that data and dissected it further. When they did, a surprising result emerged: while social influence can give a product an early advantage, that edge is typically not sustainable. As Petland's describes it, "social cues could convince you to take a look — do a little window shopping — but didn't necessarily make you go in the store and buy something."
And yet venture capitalists and entreprenuers still go to great lengths to achieve first mover status; brands spend inordinate amounts of money to create buzz; and the latest trend is to increase influence through social media. But does any of this matter in the long run? I'd say it does, but only if the product you are selling delivers real value.
In business, we too often forget that what we are selling is value: we instead try to sell technology, or packaging, or just plain vaporware. To add value, your technology needs to be productized, and to do that you need to offer unique value to a customer. Without a valuable and unique product, viral marketing, social influence and buzz will help initially but will be of no lasting consequence.
No surprise, this is what many companies are finding on sites like Groupon and LivingSocial. There has been a large backlash by companies stating that these sites just don't work: they cost a lot of money and the initial pop in sales dissipates moments later. A Rice University study found that upwards of 40% of companies who have used Groupon say they wouldn't do so again.
Is the problem actually Groupon, as was said previously with Facebook (and before that Google, Yahoo and the Internet as a whole)? No. Most businesses are quick to blame the underlying business model of these coupon sites, but the MIT research suggests otherwise: it is time for businesses to shift the blame internally and focus more on the quality of what they are selling.
Jeffrey M. Stibel is Chairman and CEO of Dun & Bradstreet Credibility Corp. He is an entrepreneur, a brain scientist, and the author of Wired for Thought: How the Brain Is Shaping the Future of the Internet.